What is ISI, or Import Substitution Industrialization?
The economic theory of import substitution industrialization (ISI) is usually followed by developing or rising market countries that want to depend less on developed countries. The plan is meant to protect and grow new businesses in the country so that their products can compete with goods from other countries. ISI theory says that the process makes local businesses and the countries that house them self-sufficient.
Learning About Industrialization Based on Import Substitution (ISI)
The implemented substitution industrialization theory’s primary goal is to protect, improve, and grow local industries using different methods such as tariffs, import quotas, and government-backed loans. Countries that follow this idea try to ensure they have production channels for all stages of a product’s life.
When a country specializes in making things at a lower opportunity cost and then exports them, this is called comparative advantage. However, ISI goes against this idea.
Origin of the theory of import substitution industrialization (ISI)
ISI refers to the economic strategies that helped countries grow in the 20th century. But the idea has existed since the 18th century, and economists like Alexander Hamilton and Friedrich List backed it up.
Countries first implemented ISI policies in the global south (Latin America, Africa, and Asia). The goal was to become self-sufficient by building an internal market within each country.
Supporting essential industries like agriculture and power generation. And pushing for nationalization and protectionism in trade policies all helped ISI policies work.
Still, developing countries slowly turned away from ISI in the 1980s and 1990s, when global market-driven liberalization became popular. This idea was based on the structural adjustment plans of the International Monetary Fund and the World Bank.
The idea behind industrialization through import substitution
ISI theory is based on a set of rules for growth. The baby industry argument, the Singer-Prebisch thesis, and Keynesian economics build this theory. We can draw a group of practices from these economic points of view: supporting and organizing the production of strategic substitutes through an industrial policy; implementing trade barriers like tariffs; maintaining an overvalued currency to assist manufacturers in importing goods; and avoiding the encouragement of foreign direct investment.
The school of structuralist economics is connected to and builds on ISI. This school of thought comes from the writings of optimistic economists. And financial experts like Hans Singer, Celso Furtado, and Octavio Paz. It stresses how important it is to look at the structure of a country or society when studying its economy. These are things like politics, society, and institutions.
The fact that emerging countries often rely on developed countries is a significant factor. The UN Economic Commission for Latin America (ECLA or CEPAL, its Spanish name) helped structuralist economics ideas become even more well-known. Indeed, Latin American structuralism has come to mean the ISI age that was popular in many Latin American countries from the 1950s to the 1980s.
Import Substitution Industrialization (ISI) in the Real World
That time began when ECLA was founded in 1950, with Raul Prebisch, who was the executive secretary and worked as the central banker for Argentina, as its leader. Prebish’s study explained how Latin America went from mainly export-driven growth to domestically focused urban-industrial growth. One academic paper called that report “the founding document of Latin American structuralism” and said it was a how-to book for industrialization through import substitution.
Following Prebisch’s call to guns, most Latin American countries went through some ISI in the following years. They started making more non-durable consumer goods, like drinks and food, then moved on to making more durable goods, like cars and tools. Some countries, like Argentina, Brazil, and Mexico, even started making more modern industrial goods like electronics, aircraft, and machinery in their own countries.
Even though ISI was good in some ways, it caused high inflation and other economic problems. In the 1970s, growth problems and problems with foreign debt made these problems worse, so many Latin American countries turned to the IMF and the World Bank for loans. After being told by these groups, these countries had to give up their ISI protectionist policies and let free trade into their markets.
Conclusion
- The idea of import substitution industrialization is one emerging countries follow when they want to depend less on developed countries.
- ISI aims to protect and grow new domestic businesses so that their goods can compete with those from other countries.
- The 1980s and 1990s were the first years developing countries turned away from ISI strategy.
